Finance: Your Toolbox

Remember my caveat and grace note about numbers? If that is going to apply anywhere for most people, it will be here. Dealing with your personal finances – especially if you’ve ignored them for too long – can be one of the scariest things to face. You can do it! You are not your numbers! Put a stake in the sand and mark where you are. You can’t change anything until you have an idea of where you are. (And who knows! It may not be as bad as you think…)

If you’re reading this and you’ve just started your adulthood journey – lucky you! You have a chance to make a clean start and keep it that way. By saving from the beginning (even if it’s not much), you’ll have a nice nest egg in case of any future financial issues. Or even better, if you don’t use it, it’s there for your retirement!

For the rest of us, I repeat – we are not our numbers. You have to know what your numbers are before you can make educated decisions and goals. Distance yourself from your numbers if you need to, and pretend like you’re giving advice to a good friend if that keeps it from being quite so scary.

S0, a bit about my background before we go on since I have a unique perspective. I am the CFO for the property management company that I own. I see the results of a lot of decisions for both our owners and residents, both good and bad. In taking an arm’s-length view of them, I can see that the financial issues that some of the people deal with are a direct result of poor decisions they make. If you find yourself in a financial situation, please don’t ignore things. You need to know what is important to you and your family. If you have to choose between your cable bill and your rent, I would venture to say that keeping a roof over your head is more important than being able to watch TV. Granted, I am oversimplifying and generalizing a bit, but I have seen that exact decision lead to a loss of housing. Please be smart!

Ok. Continuing on!

If I wanted to be technical, all you really need is a pen and paper. But I want to go a bit beyond that.

The basics:

• Your most recent financial statements. Yes. Round them all up, whether you’re finding the paper you got in the mail or downloading them from the web. Make sure you have everything so you can get an accurate financial picture: bank statements, credit card statements, statements for home loans, car loans, investments, retirement accounts, any type of savings accounts that you may have. Pull them all together. Going forward, you’re going to want to look at the new ones you receive each month.
• A budget. There are two ways to go about this, so I’m going to break from the list for a moment.

Zero-based budgeting means that you start from scratch whenever you are getting ready to make your budget. Generally, you’ll do this at least annually or if a dramatic change has happened in your life. This is very easy if you are getting ready to make a change to a major fixed expense – maybe you’re looking at buying a house or renting a new apartment. Essentially, you look at your income and then give every dollar a job, whether to pay an expense or to be saved for the future.

Traditional budgeting involves looking at what your expenses have been for the last 3-12 months and then making adjustments based on the changes you want to make. Generally, you will want to keep track of expenses based on your budget categories for a month or two, then look back 12 months for any major annual or semi-annual expenses you will need to plan for (car registration, property taxes, etc.)

Both types of budgets have two general sets of expenses in common: fixed expenses and variable expenses. Fixed expenses are ones that are very difficult to change or get away from paying and tend to be a fairly consistent amount each month – for example, mortgage or rent payments and loan payments. Variable expenses you have some level of control over, whether you choose to spend less or not at all in that category. For example, you could spend less on food or choose to forego buying new clothes for a while. Utility bills generally are variable to a point – most utilities have a minimum charge even if you use an amount under the baseline level.

There are two schools of thought on where to start your budget. You can either start with your fixed expenses and then delegate what’s remaining to variable expenses and savings. Or, you can start with your savings and charitable contributions, deal with your fixed expenses, and then your variable ones. Neither is technically better than the other; it all depends on what is most important to you.

Sample general budget categories could be:

• Housing (including mortgage or rent and all housing-related costs)
• Auto, Clothing and Self care items (haircuts, makeup)
• Subscriptions (magazines, memberships)
• Food and Groceries
• Charitable contributions and Savings.

I would venture to suggest that while housing may be the most expensive part of your budget, only 20-25% of your income toward this category should be the goal. During the financial crisis in 2008, I saw so many giant homes with very little furniture and no landscaping, so it was evident that the owners had stretched themselves on the house itself and left no money for other things – just because they could qualify. When economic issues hit, they had no wiggle room in their budget to stay afloat.

A final thought related to an earlier one. One of the best reasons to go through the budgeting exercise – aside from the obvious one of making sure you’re not spending more than you have – is to solidify what in your budget is important and what isn’t. If your hours are cut at work, or a spouse is laid off, you know where you can trim in without causing major issues. If you plan to save from the start and have money set aside, this is even easier.

I’m going to mention it below in the extra credit section, but it bears mentioning twice. I have used a lot of the budgeting and finance software out there (Microsoft Money, Quicken, Mint, to name a few), but I have found You Need a Budget (or YNAB) to be hands-down the best budgeting software out there, and the support materials regarding how and why to budget are amazing. Please go read the how to budget information, even if you don’t want to purchase the software. This is not an affiliate link, but just a recommendation from someone who admires the work and thought that went into it.

Extra Credit:

• Budgeting software or a spreadsheet. A spreadsheet is one end of the spectrum, or you can use a program like Mint or You Need a Budget (see glowing review above). I would say that the difference between the two is that Mint is more of a money tracking program (reactive), and YNAB is a budgeting program (proactive).

To wrap everything up, having basic financial skills is essential to surviving and being self-sufficient in the modern age. If you are in a relationship where your spouse takes care of all the bills, please (please!) ask to at least be aware of what is going on. You don’t have to be involved, but at least be aware. I have seen situations where the person responsible for the finances passes away unexpectedly, and the surviving person has to not only deal with that grief but also try and recreate and discover what their financial picture really looks like.

So I realize this really just the briefest of overviews. I will talk about other basic finance concepts, like net worth and dealing with debt, and more in depth ideas about budgeting in future posts.

Do you have a budget? (If not, do you pledge to make one?) If you do, what category to you find the easiest to reduce if needed? The hardest?